This is the second in a four-part series on home mortgages. (Click here to read Part 1 – The Home Mortgage Interest Deduction) We will examine what can be deducted as home mortgage interest. Interest on the debt is deductible up to the statutory limits on the amounts of deductible debt ($1,000,000 for acquisition debt, $100,000 for home equity debt). Interest on excess debt is personal debt and not deductible. In addition, any amount of home equity or refinanced debt that is not used build, buy, or improve the residence is also classified as non-deductible personal debt.
Archive for John Stancil
This is the first in a four-part series about home mortgage interest. One would think that deducting home mortgage interest on your taxes would be a simple, straightforward process. And for most taxpayers, it is. You get your 1098, enter the amount of interest shown on the form, and proceed to the next item. For others, the situation may not be quite so simple.
When starting a business, the owners are likely to incur two classes of costs that are not normally encountered in the ongoing operations of the business and should not be included as operating expenses. These are start-up expenditures and organization costs. Each of these are specifically defined and receive special tax treatment.
You own a beach cottage or a mountain cabin. As much as you would like to live there year-round, it just is not practical, so you rent it out when you are not using it. Is this taxable income? Can you deduct a loss? As with so much in taxes, the short answer is “it depends.”
Nothing, it seems, lasts forever, and it is likely there will come a time when you will dispose of your passive rental activity. When this occurs, there are a number of issues that arise. What happens to those suspended losses that were previously denied? What is adjusted basis? What is depreciation recapture? Is there a profit or a loss on the sale? How much tax will I pay?
We will attempt to clarify these issues in this article.
Passive loss rules do not apply to real estate professionals. However, the rules for who is a real estate professional for tax purposes are rather specific and the IRS enforces these rules rather strictly. If one is classified as a real estate professional, any losses are treated as ordinary losses and may be deducted against other income sources. Gains are taxed at ordinary income rates, however, income from rental activities is not subject to self-employment tax. However, rent is one of the categories of income that is subject to the Net Investment Income Tax, so there may be an additional 3.8% tax on these profits.
This is part 2 of 5 in a series on Passive Activities. (Read Part 1 here)
Prior to the Tax Reform Act of 1986 (TRA), taxpayers were allowed to deduct non-economic losses from passive activities from wage and investment income. Thus, the infamous term “tax shelter” was commonly used in tax planning. However, in the TRA, tax shelters went the way of income averaging and ACRS depreciation, along with other now defunct aspects of our tax code. While the law did not ban such activities, it severely restricted taxpayers’ ability to deduct losses from what is termed “passive activities.”
This is part 1 of 5 in a series on Passive Activities.
Many things can be classified as rental activities. You rent a car; you book a hotel room; you lease an office machine; you pay for a parking space. All of these fall under the broad category of being rental activities. However, there is a more limited definition of a rental activity for passive loss purposes. If a rental activity is not considered passive, it is treated as a business.
I recall the first year my wife and I filed a joint return. I was a graduate student with a part-time job. She was fresh out of nursing school and employed at a local hospital. When we prepared our tax return, we owed $400. That was a lot of money in 1970, especially for people in our situation. What happened? We were victims of having multiple sources of income between the two of us and did not have the correct amounts withheld from our incomes.
Utah Senator Orrin Hatch (R) recently sent a letter to IRS Commissioner John Koskinen. At the heart of the issue raised by Senator Hatch was his concern that many private museums should not receive 501(c)(3) tax-exempt status. Much of his reasoning seems to indicate a lack of understanding in regard to many of the smaller museums that dot the landscape of the United States. While not major tourist attractions, these museums do much to help preserve the history of a particular segment of our past. Many may not have wide appeal, but there frequently are a small cadre of dedicated adherents. I will, however, be the first to admit that 501(c)(3) tax-exempt status may be abused by an individual seeking to shield his hobby from any tax consequences while generating a revenue stream or other tax benefits. But don’t penalize all small museums due to a few bad apples.
Not surprisingly, tax fraud is rampant in the area of education credits and the tuition deduction. According to the Treasury inspector General for Tax Administration (TIGTA) 3.6 million taxpayers claimed over $5.6 billion in potentially
erroneous education tax credits in 2012. Of over 10 million claims for the American Opportunity Tax Credit, 2.5 million were not supported by a Form 1098-T. As a result of this report, the IRS will audit more returns on which education credits are taken. Also of interest in the report is that in 2013 there were 2,300 claims for individuals under the age of 14 and 3,000 over age 80.
Next January when you receive your mortgage interest statement from your lender, you might notice some changes on the Form 1098. Beginning in 2016, the mortgage interest statements must reflect the outstanding principal balance, the loan origination date, and the address of the property that secures the mortgage. All of this is information that has not traditionally been included on the mortgage interest statement. However, due to the complexity in the laws in regard to the deductibility of mortgage interest, these are welcome changes. In a perfect world, everything would be simple and there would be no need for this information, but we must play the hand we are dealt. Let’s look at each of these requirements and the reasons for each.